EL SALVADOR PLANS TO ADOPT THE US
DOLLAR
Posted
March, 2001
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by Andrew Bounds, Panama City
- London Times Financial News
El Salvador will allow the US dollar to circulate freely
alongside its own currency in the new year under a monetary law sent
to Congress by the president on Thursday.
The legislation would fix the exchange rate between the dollar
and the colon at 8.75 and allow its use as a unit of account and in
all transactions.
President Francisco Flores said in a surprise televised
announcement that the measure stopped short of full dollarisation,
as introduced in Ecuador, but would ensure "that El Salvador has a
world-class medium of payment that facilitates the commercial and
financial integration of the country". The aim was "to stimulate the
economy in the short-term and to bring stability and confidence in
the long-term", he said.
The central American state has long been seen as a candidate for
dollarisation. Its currency board has fixed the exchange rate for
eight years, backed by $2bn in central bank reserves, and its
economy is tied heavily to the US. Almost a fifth of the population,
1.2m people, live in the US, and are expected to send back a record
$1.5bn in hard currency this year. Its biggest imports and exports
are US textiles processed in its booming maquila industry. Most of
its coffee exports go there, too.
Washington and the International Monetary Fund greeted the
Salvadorean move positively, but both stressed that adopting the
dollar on its own would not be enough.
Larry Summers, the US treasury secretary, said: "We welcome El
Salvador's proposal to use the US dollar as its currency. Combined
with a strong economic policy framework, this step should help
contribute to financial stability and economic growth in El Salvador
and its further integration into the global economy."
Horst Kohler, the IMF managing director, said: "This plan, if
accompanied by the proposed fiscal measures now being considered by
the assembly and by continued efforts to improve banking
supervision, would build on El Salvador's solid track record of
economic reforms and promote more rapid economic growth."
El Salvador would be the third Latin American economy formally to
adopt the dollar, after Panama and Ecuador.
The US has made it clear it will not change its monetary or
exchange rate policies for the benefit of economies that have
adopted the dollar, nor would the Federal Researce stand behind
their banking systems.
The US Treasury this year withheld backing for legislation that
would have allowed, after a transistion period, the Federal Reserve
to share seigniorage - the financial benefit accruing to the US by
being able to issue currency that pays no interest - with
dollarising governments.
Analysts in Central America said Mr. Flores' hand had been forced
by poor economic performance. Gross domestic product rose 2.5 per
cent in 1999 and is forecast to only equal that this year. Although
inflation is around 3 per cent, interest rates hover around 20
percent, leading to low investment.
The dollar would enter circulation on January 1, 2001.
Courtesy: Ron
Richardson
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